News

Cava Group (NYSE: CAVA) stock has electrified investors as one of the most exciting initial public offerings (IPOs) in a recent dry spell. Its healthy Mediterranean menu is attracting customers while its stock attracts investing dollars.

Cava stock is already up 96% this year. Is there still time to buy into this growth story?

Why Cava stock is surging

Cava could be the next Chipotle Mexican Grill, and considering Chipotle's massive stock run, investors want to get into Cava stock early. Cava operates a similar model to Chipotle, offering healthy, fast-casual fare that uses a limited number of ingredients, like harissa, tzatziki, and lamb meatballs, and is easily replicable across stores. So far, it's a hit in the regions it's already entered, which is throughout the southern part of the country. It only has 323 restaurants as of the end of the first quarter, but it believes it can succeed throughout the U.S. As it continues to expand, it looks like a no-brainer for growing revenue and scaling.

Most of its growth is coming from new stores. Total revenue increased 30% year over year in the 2024 first quarter, and same-store sales were up 2.3%, a sharp deceleration. Management had previously said that its strong same-store sales growth was aided by the hype surrounding its IPO, and while that lasted for a while, it's over.

However, it's still reporting positive same-store sales during a pretty rough time, which is impressive, even though it's slowing down. The likelihood is that same-store sales will accelerate under improved operating conditions.

Cava is scaling efficiently and has been reporting increasing profits. Net income was $14 million in the first quarter after a $2 million loss last year, and it reported a full-year profit of $13 million in 2023.

The company is exceeding its own expectations, and management raised guidance across measures after the first-quarter report. It's expecting 5.5% same-store sales growth, raised from 4%, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of around $103 million, raised from $89 million. Cava stock jumped after the report.

It may also have benefited from Chipotle's recent stock split. Since investors see Cava as the next Chipotle, hype around Chipotle probably trickled down to Cava stock, too.

Is there any more upside for Cava stock?

It sounds great, right? For the most part, yes. But there could be a few holes in the investing thesis.

One is valuation. Cava stock has an astronomical valuation, and it will take some time to grow into that, even if everything goes right in the business.

This is unusual for the current market. Investors who only had experience in a soaring bull market got a rude awakening when high inflation hit and the market tumbled, and they're generally being more careful right now. Valuation isn't the only thing that matters in a stock, but it should always be a consideration. And a stock that can't carry a premium valuation will eventually drop.

The other important concern is that Cava is so young. Yes, buying now may give investors the best chance to maximize gains in the long run, but there isn't a substantial track record to give investors full confidence that Cava can profitably pull off an ambitious expansion plan. And with its hefty valuation, it can't afford any missteps.

I'd be very wary about Cava right now. It may continue to climb, but there isn't a great underlying basis to support that, and it seems to be supported by a lot of hype (and hope). You don't know when the tide is going to turn, so I'd stay away for now and keep Cava on my watch list for a better entry point.

Should you invest $1,000 in Cava Group right now?

Before you buy stock in Cava Group, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Cava Group wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $780,654!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of July 8, 2024

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.